UK TMT Industry in a post-brexit context. December, UK TMT Industry in a post-brexit context 1

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1 UK TMT Industry in a post-brexit context December, 2016 UK TMT Industry in a post-brexit context 1

2 2 willistowerswatson.com

3 UK TMT industry snapshot 8.8bn investments from the EU into the UK R&D and innovation 161bn UK Digital Tech industries turnover Ecommerce 573bn 100m EU Media budget contribution to UK film industry 58,000 identified active digital tech businesses 3.8bn in retail revenues for mobile services 1 in every 10 jobs in London 1.6m Technology jobs 44% exports going to the EU 25% Tax relief available for UK Films provided by EU regulation Impact of Brexit on the UK TMT industry EU Directives are the primary source of the framework that covers fixed and wireless telecoms, internet, broadcasting, and transmission services in Europe. These will likely remain in place until the transition to a new model for the UK and EU has been completed. In the longer term however, the UK Government may make changes and is likely to start to diverge from EU regulation and practice. The future holds possible fragmentation of the digital regulatory environment which could create obstacles for firms to trade cross-borders. Factors that impact the TMT industry Access to talent 1 Media and technology businesses rely on a pool of young creative talent, many of whom come from the EU. The start-ups in this sector have already indicated that an adequate replacement for freedom of movement of workers would be critical for continued growth in the UK. Loss of freedom of movement in the EU could result in a shortage of EU talent for businesses and impact future growth of UK s technology and media sector. Furthermore, it may impact London s position as a hub for digital start-ups in Europe. The digital single market 2 As a leader in e-commerce, the UK would have stood to benefit significantly from the Digital Single Market (DSM) which seeks to remove obstacles to the development of cross-border e-commerce within the EU. However, progress of the DSM itself may slow without the backing of the UK, a key digital player in Europe. If UK-based digital companies were to be excluded from the DSM at a later stage of negotiations, they could possibly lose out on the benefits of doing e-commerce with ease across the EU. UK TMT Industry in a post-brexit context 1

4 Exchange rate fluctuations The devaluation of the pound is increasing hardware/cloud costs for the vast majority of the sector. A case in point is Microsoft which has just announced an increase of 22% in cloud prices. Other large companies such as Google and Amazon also invoice foreign currency which will have significant impact in the UK. Access to finance 1, 2 Britain has long been seen as a hub for creative excellence and tech innovation, attracting money from foreign investors, who often see the UK as a gateway to the European market. Challenges could emerge, however, if investors perceive that it has become harder for UK businesses to trade with Europe and attract foreign talent. Data protection 2, 4 There is much doubt and uncertainty on the future of the data protection framework for businesses in the UK. Particularly as the new General Data Protection Regulation (GDPR) is set to come into force before UK exits the EU. Although the UK would likely put into place equivalent law around data protection, companies conducting business in the EU and the UK may be required to comply with two sets of regulations regarding Data Protection. Drivers and opportunities IP Law With current legislation constructed around European Directives and Regulations, it is likely that the UK would retain or implement laws in line with existing regimes. However, Brexit could give the UK more flexibility in interpreting those laws and in shaping exceptions. It remains to be seen how the UK amends IP law in the future as it has been a strong advocate of enhancing copyright law to reflect the realities of digital world. Research and development EU research enables multinational cooperation between research organisations across Europe, giving the UK science base an edge over competitors outside the EU, including the US. The UK is also one of the biggest beneficiaries from European research funding with 8.8bn of EU investment in As a result of leaving the EU, the UK s higher education institutions may be excluded from EU funding programmes such as the Horizon 2020 program, currently worth about 80 billion. Net neutrality 1, 2 Under the EU rules on net neutrality, which came into effect on 30 April 2016, the blocking or throttling of traffic by ISPs will be prohibited. If as a result of Brexit this regulation were to cease to apply, the UK may choose to apply different rules on net neutrality. The UK Government has shown interest in making amendments in this area and changes may be made after the UK has left the EU. Regulatory changes Data protection 2, 4 Leaving the EU presents the opportunity for the UK to build a more business friendly environment. In cases where companies only deal with UK data, there is an opportunity for UK datacentres to be utilised to benefit from more relaxed data legislation in the UK, however, they would have to comply with two sets of regulations for EU wide operations. IP Law After leaving the EU, the UK could make changes to IP law, having been a strong advocate of evolving copyright laws in the past. Bureaucracy Increased flexibility due to the removal of EU legislation may result in the reduction of costs of bureaucracy, enabling UK businesses to trade more freely with non-eu countries. Exchanges rate fluctuations Professional, scientific and technical activities along with information and communication are the two largest industries for UK exports with a total value of more than 60m. The devaluation of the pound could mean a net benefit to UK TMT businesses. Equally, a cheaper pound together with a more open regulatory environment may be attractive to foreign investors. Research and development The aid that can be given to businesses for R&D is in part, subject to EU legislation. With a departure from the EU, the UK government will have the opportunity to change or create new schemes for both small and large enterprises. In addition to this, Brexit could also uncover more opportunities for innovation and investment from non-eu emerging markets such as India and the US. 8 The impact of Brexit could result in an increase of investment in R&D activity especially if Brexit increases the government s ability to control tax relief schemes. 9 Tax credits TMT companies operating in the UK are subject to Research and Development Credit (RDEC), and the Small and Medium Enterprise (SME) scheme that are governed by EU State Aid legislation. Once the UK is outside of the EU, the UK will be free to offer tax credits and reliefs as it wishes. For example, it could technically allow companies to claim tax credits on expenditure for which a grant has also been awarded. 2.45bn of R&D tax relief was granted to UK businesses in 2015, less than 50% of what is actually available to claim in the UK. 9 The current Film Tax Relief (FTR) scheme offers producers a rebate of 25%. However, currently the UK is bound by rules on State Aid and does not have a free hand to change government incentives and subsidies without EU approval. After leaving the EU, the government would be able to offer further incentives to the UK film industry willistowerswatson.com

5 Telecommunications Uncertainty around Brexit appears to be having an impact on the telecoms sector in terms of the timing of transactions and the risk of business relocations. However, with a largely domestic customer base, telecoms companies seem more resilient than other sectors. 12 The UK is currently seen as a leader in the field of sensible and practical telecoms regulation, and has historically been a strong influencer on EU telecoms rules. Following Brexit this position of strength could be lost and, depending on the terms of exit, the UK may still have to adhere to EU rules. Portability regulation 3, 4 The draft Portability Regulation is an important development under the DSM stating that EU consumers can access online content from their portable devices when away from their Member State of residence. If the UK were to join the EEA or EFTA, the Portability Regulation would almost certainly continue to apply. However, if the UK does not join the EEA or EFTA, there would be no obligation on content service providers to ensure that UK consumers could access their online content in the EU or that EU consumers could access content when in the UK. Telecoms infrastructure 1, 2 EU law prohibits using taxpayer-funded resources to provide assistance to one or more organisations in a way that gives an advantage over others except in strictly specified circumstances. This concept, known as State Aid, restricts the UK s ability to invest directly in the broadband infrastructure in the UK. After Brexit, the UK has an option to potentially remove this prohibition. As a result, the UK could offer Government backed financial assistance to companies to help them boost their copper and fibre. Roaming charges 1, 2 Under the Roaming and Open Internet Regulation, roaming charges are due to be abolished for all end-users by June If the UK exits the EU and the EEA, it may not be able to benefit from these provisions and higher roaming charges could be applied to UK mobile users when travelling in the EU. UK networks will also be entitled to apply roaming charges for EU citizens roaming in the UK. Opportunities Changes to Regulation: Depending on the exit terms the UK may no longer be bound by telecoms regulations with which it disagrees. An example might be the new rules against zero-rating (part of the BEREC net neutrality guidelines mentioned above) which could apply significant constraints on EU telecoms businesses and their retail propositions. Telecoms Infrastructure Investments With the departure of the UK from the EU, restrictions derived from State Aid would no longer limit the UK s ability to invest directly in broadband infrastructure UK TMT Industry in a post-brexit context 3

6 Media Enders Analysis predicts that the media industry will experience a significant negative impact as a result of the Brexit vote. In 2015 the media sector had performed strongly and the outlook for 2016 was positive. Only the Internet sector is still expected to perform at close to its original forecast. Figure 1: Real growth at constant 2015 prices Actuals Enders mid-february forecasts Enders post-brexit outlook 2015 Growth TV 4, % 4.7% 3.5% 0% to 2% -4% to 2% Internet 2, % 18.4% 11.4% 10% to 16% 0% to 10% National newspapers % -15.8% -15.3% -20% to -25% -20% to -25% Local newspapers % -6.6% -6.6% -10% to -20% -12% to -25% Magazines % -9.4% -10.4% -10% to -15% -10% to -20% Out of home 1, % 4.8% 3.5% 0% to 4% -8% to 2% Radio % 3.0% 3.3 % -2% to 2% -8% to 2% Cinema % 2.0% 3.0 % -2% to 2% -8% to 0% Total 11, % 5.4% 3.7% Print media may see the greatest impact with its exposure to consumer demand. Enders analysis finds that an economic downturn or recession could see newspaper ad spend, which was already dropping as more readers switch to online, decline as much as 20%. TV spend in the UK, has proved more resilient according to Enders. Advertisers still look to TV as a mass-market branding medium, and conversations with media buyers had suggested TV ad spend until the end of August would be up about 2% to 3%. 13 Regulation 15 As a result of Brexit there may be implications for the licensing of services in the UK by Ofcom, and an impact on pan- European/overseas audio-visual services that currently fall under the UK regime such as the country of origin principle under the Audio Visual Media Services (AVMS) Directive. UK broadcasters might lose the benefit of the country of origin principle, set out in the AVMS. Whilst some international agreements would remain, this would likely challenge the activities of those broadcasters making their content available across the EU and increase the regulatory burden on UK broadcasters. Media companies may need to look into the possibility of obtaining broadcasting licences in one or more remaining member states. In addition to this, the continued application of European Convention on Transfrontier Television an international treaty creating a legal framework for the free circulation of transfrontier television programs in Europe, through minimum common rules, in fields such as programming, advertising, sponsorship and the protection of certain individual rights will be in question. 1, 14 Operation of the media industry As the media sector moves further towards complete digital delivery, any changes or departure from the DSM could have a significant impact on the media industry. Issues such as portability, challenges to territorial licensing via e-commerce, the Satellite and Cable Directive are all subject to current EU directives and will need to be reviewed in the wake of the UK s exit from the EU. Restrictions on the movement of cast and crew, and of physical goods such as DVDs, such as tariffs, taxes and permits, are all possibilities. British/European co-productions might become harder and less attractive with uncertainty and the fall of the pound in the short term, and the requirement for legislation on co-productions required in the longer run. Furthermore, existing funding through the EU such as MEDIA/ Creative Europe funding will no longer be available. Opportunities UK tax credits: EU rules required the UK Film Tax relief to be applied equally to favour all Europeans equally. Leaving the EU will remove restrictions on UK film tax policy allowing the UK to tailor film incentives to the needs of the UK film industry. Devaluation of the pound: if the devaluation of the pound continues, the UK will become increasingly attractive for foreign productions. 4 willistowerswatson.com

7 Technology One of the key issues facing the digital sector, is the adverse impact the UK s departure from the EU would have on the ability to recruit and retain tech talent from within the EU. The UK s home grown tech talent pool is seen as limited, with supply being outstripped by demand. With digital technology industries growing on average 32% faster than other sectors, the tech economy accounts for almost 1.6m jobs. 14 The relative ease with which UK tech businesses, particularly in London, have to date, been able to recruit EU engineers has undoubtedly been one of the cornerstones to the UK establishing itself at the forefront of the European tech economy. Exchange rate fluctuations Devaluation of the pound will increase hardware and cloud costs for the vast majority of sectors utilising this technology. A case in point is Microsoft which has just announced an increase of 22% in cloud prices. Executives in foreign tech companies with large stock options in foreign currencies have benefited from the impact of the Brexit decision on the pound. 15 Talent 6 The UK technology sector relies heavily from being able to attract talent from across the EU. The loss of free movement within the EU, combined with a shortage of technical talent will impede on growth prospects for the UK technology sector. Access to finance 6 The UK technology sector relies heavily from being able to attract talent from across the EU. The loss of free movement within the EU, combined with a shortage of technical talent will impede on growth prospects for the UK technology sector. Opportunities Technology investments: The UK s technology sector will continue to receive strong investment despite Britain s vote to leave the European Union, according to leading global investment firms Venture capital houses such as Index Ventures, Octopus Ventures, Balderton Capital and Hoxton Ventures, are among a winder group of investment firms to pledge their continued support for the sector, with many citing London as an important hub for future growth. 16 Agility of FinTech/startup companies: Innovative technology companies may respond to challenges by evolving and developing ways to overcome the loss of passporting rights and other regulatory changes, finding new suppliers and customers and supporting them to navigate the new problems created by the Brexit decision industry/ UK TMT Industry in a post-brexit context 5

8 Technology, Media & Telecommunication (TMT) Industry Strength A strong client focus, an emphasis on teamwork, unwavering integrity, mutual respect and a constant striving for excellence are the values at the core of the new Willis Towers Watson organisation. >5,000 TMT Clients $400m Revenue 94% of F500 TMT clients +400 TMT focused Colleagues 6 former TMT Insiders (Risk Managers) 7 Global Centres of Excellence Contacts Fredrik Motzfeldt GB Industry Leader Technology, Media & Telecommunications T: +44 (0) E: fredrik.motzfeldt@willistowerswatson.com Tina Veale LLB (Hons) Industry Specialist Technology, Media & Telecommunications T: +44 (0) E: tina.veale@willistowerswatson.com Karl Sawyer CIRM Industry Specialist Technology, Media & Telecommunications T: +44 (0) E: karl.sawyer@willistowerswatson.com About Willis Towers Watson Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 39,000 employees in more than 120 countries. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas the dynamic formula that drives business performance. Together, we unlock potential. Learn more at willistowerswatson.com. Willis Limited, Registered number: England and Wales. Registered address: 51 Lime Street, London, EC3M 7DQ. A Lloyd s Broker. Authorised and regulated by the Financial Conduct Authority for its general insurance mediation activities only. FP2168/16538/11/16 willistowerswatson.com 6 willistowerswatson.com